Tqm 672u2e

TQM (Total Quality Management)/Sustainability initiatives can reduce material, labor and istrative costs, shorten the length of time required for R&D projects to complete and increase demand for the product line. The impacts of the investments produce returns in the year they are made and in each of the following years. The two sustainability-oriented initiatives, the UNEP Green Program and GEMI TQEM, can lower labor and material costs. The UNEP Green Program also can improve customer perceptions about your company, which leads to increased sales. The remaining initiatives can also increase efficiency and lower costs. Your company needs to determine which initiatives best serve its purposes. If you are keeping automation levels low so R&D projects complete more quickly, you might want to invest in areas that lower labor costs (for example, Quality Initiative Training). If your company is competing in the high technology segments, with high material costs, you might consider initiatives that reduce material costs (for example, Continuous Process Improvement). To maximize the effect, companies should find complementary initiatives and invest in each of them. For example, to reduce material costs, companies should consider investing in both I Systems and GEMI TQEM Sustainability. The impacts of these initiatives improve business procedures, resulting in improved efficiencies and cost structures: o

I (Continuous Process Improvement) Systems: Reduces material cost and to a lesser degree labor costs;

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Vendor/JIT (Just in Time [Inventory]): Reduces Material costs and istrative overhead;

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QIT (Quality Initiative Training): Reduces labor costs;

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Channel Systems: Increases the effectiveness of the sales budget, and therefore demand;

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Concurrent Engineering: Reduces R&D cycle time, the time needed to move sensors on the Perceptual Map and to change MTBF specifications. R&D costs are determined by the length of time they require, therefore Concurrent Engineering also lowers R&D costs;

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UNEP Green Program: The United Nations Environment Program increases the effectiveness of the sales budget (customers prefer products made by socially responsible manufacturers), and therefore increases demand. Green programs also reduce waste and therefore material costs. The impacts of these initiatives improve product quality while reducing the time and resources required to design, manufacture, warehouse and ship products.

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Benchmarking: Reduces istrative overhead;

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Quality Function Deployment Effort: Reduces R&D cycle time and enhances the effectiveness of the Promotion and Sales Budgets;

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CCE (Concurrent Engineering)/6 Sigma Training: Reduces material costs and labor costs;

GEMI TQEM Sustainability: The Global Environmental Management Initiative Total Quality Environmental

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Management initiative reduces labor costs as it minimizes environmental risks. These include production methods which protect employee health and redesign of products to have fewer toxic by-products. The initiative also reduces material costs, as it promotes recycling and other material use efficiencies. o

7.1.3 S-Shaped Curve

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For each initiative, returns for investments follow the shape of an S-curve (Figure 7.8). That is, if you spend too little or too much the returns on your investment are poor. If you spend less than $500,000 in any initiative in a single round chances are you will see little return. An investment of $1,500,000 in a single round produces a cost-effective impact, investments over $1,500,000 become dollar for dollar less effective. Finally, for each initiative, an investment over $2,000,000 in a single round produces absolutely no additional benefit.

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For each impact, complementary initiatives combine together to increase the total effect. You should bundle your investments in multiple initiatives that have an impact important to your company’s strategy. By spreading your investment among complementary initiatives you can invest more in each impact than the limit of $2,000,000 for an individual initiative.

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You can target multiple impacts, such as both material and labor cost reduction; this can be a substantial investment in any given year. As you fine tune your decisions, keep an eye on the Projected Cumulative Impacts to ensure that your investments are creating cost-effective returns.

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Companies that invest in the same initiatives over two or three rounds (depending on the amount of money) will experience decreasing and eventually no additional returns for their investments.

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S-Shaped Curve

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Expenditures beyond $4,000,000 over two or three years in each initiative pushes well into diminishing returns.

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For example, suppose a company wants to reduce the time required to complete R&D projects by investing in Concurrent Engineering and Quality Function Deployment. An aggressive schedule would be $1,500,000 this year (staying within acceptable diminishing returns); $1,500,000 next year (which would not produce as much benefit, but would continue to improve R&D cycle time); and $1,000,000 in the third year.

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The TQM area displays the projected impacts for the current year. As companies make decisions, worstcase/best-case sets of outcomes are predicted. These are also carried into the proformas. The spreadsheet

can only offer a range of possible savings. Actual results appear the following round on page 12 of The Capstone Courier in the HR/TQM Report. o

to the Capstone Spreadsheet and click the Decisions menu. Select TQM/Sustainability. Investments are entered in the green cells. Projected impacts also display.

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1. True or False: Diminishing returns will occur when investing in the same TQM Initiative round after round. A. True B. False With sufficient investment, initiatives will improve processes and quality to the greatest extent possible, however, each initiative will reach a point where no further improvement is possible, therefore the investments create no additional returns.

2. True or False: According to the S-Shaped curve, diminishing returns for a single year budget become noticeable at $2,000,000. A. True B. False The S-Shaped curve predicts return on investment. Depending on the slope of the curve, the return on investment can be small or large. For example, suppose a project is budgeted at $500,000. This project might go through a planning stage that produces a set of recommendations, but there is no money left to implement the recommendations. At $1,000,000, sufficient funds are available to plan, and begin implementing the recommendations. At $1,500,000, the budget is sufficient to plan and put in place most of the recommendations. At $2,000,000, all of the recommendations have been implemented, and additional money beyond that level has little or no effect.

3. True or False: If a company with low automation wanted to invest in a single area that exclusively lowers labor costs, they would select QIT (Quality Initiative Training).

A. True B. False The TQM area allows teams with an established strategy to invest in areas, which will benefit them the most. For example, if a team formulates a strategy that sacrifices labor cost so it can complete R&D projects faster, it would want to invest in QIT, which reduces labor costs.

4. True or False: The exact outcome of TQM efforts appear on the TQM Report, and as bar charts on the TQM spreadsheet. These results are for the previous round only, assuming no additional investment is made. A. True B. False TQM investments take effect the year they are made, and are cumulative, paying off year after year.

5. The TQM report can be accessed from the ____________. A. Capstone(r) Courier B. Industry Conditions Report C. Annual Reports The TQM information appears on the last page of the Capstone Courier.

hen the Human Resources Module is activated, three areas must be addressed: 1.

Complement: The number of workers in the workforce. Needed Complement is the number of workers required to fill the production schedule without overtime.

2.

Caliber: The talent of the workforce. If companies are willing to spend the money, they can recruit a higher caliber of worker. This results in higher productivity and lower turnover. Companies set a Recruiting Spend budget of up to an additional $5,000 per worker. If they spend nothing extra, their recruitment cost per worker remains at $1,000 and they get an average person off the street. The more they spend, the higher the caliber of the worker.

3.

Training: The amount of time workers spend in training each year. Training leads to higher productivity and lower turnover, but takes people off the job while they are in the classroom. Each training hour costs $20.00 per worker. Investments in Recruiting and Training raise your Productivity Index, which in turn lowers your per unit labor costs.

After reviewing this section, test your knowledge by clicking HR Quiz to the left.

Human Resources decisions are made in two locations: 1.

The Workforce Complement percentage is entered at the bottom in the Production area;

2.

Recruiting Spend and Training decisions are made in the Human Resource area.

When the module is not active, the Needed Complement will always be 100% and the Recruiting and Separation costs will automatically update as production schedules are adjusted.

Each production line has a 1st Shift Capacity, which is the number of units, in thousands, that can be produced each year by running a single eight hour shift. Companies can produce up to twice the 1st Shift Capacity by running a 2nd Shift and/or Overtime. 2nd Shift means workers arrive at the end of the 1st Shift and work a full 8 hours. Overtime means workers stay on past the first 8 hours of their shift.

Workforce Complement Percentage Entered in Production: Management has opted to hire 98% of this year's Needed complement (729 workers). The company will have 666 1st Shift workers and 48 2nd Shift workers for a total of 714. Some of these will work Overtime hours, which will for 2.2% of the production schedule.

In the Production area's Workforce Complement row, the This Year (%) cell conveys the percentage of the Needed Complement that will be hired this year. 100% means that every job slot will be filled. While you can enter a percentage in excess of 100, the system will reject this entry and only hire the Needed Complement. As a matter of policy, your company might want to hire fewer than the Needed complement. For example, a company buys automation that will become operational the following year. The managers know that next year the company will not need as many workers. The company can save recruitment costs this year and separation costs next year if it asks 1st Shift employees to work on Overtime versus hiring 2nd Shift workers who will be let go in a year's time. However, Overtime can erode a company's Productivity Index. 7.2.2 Productivity Index

As decisions are entered, a projection of this year's Productivity Index will display on the Human Resources page. The higher the index, the lower the company's per unit labor cost (see 7.2.3 for a detailed explanation of the Productivity Index and labor costs).

Human Resources Recruiting Spend and Training budgets are not entered in thousands. To spend $5,000, enter 5000.

Training Hours and Recruiting Spend Entered in Human Resources: The company has decided to ask each worker to go through 80 hours training in the year. Training is projected to increase the Productivity Index 0.5%. Investing in Recruiting Spend, which are bonuses to hire a better caliber worker, would also raise the Productivity Index.

If Labor Negotiations are scheduled, increases in the Productivity Index can be lost if the company uses a low wage/benefit tactic (see 7.3 Labor Negotiations). The Productivity Index can never fall below 100%.

After the round is processed, the results of all HR investments appear on page 12 of the Capstone Courier in the HR/TQM Report. .2.3 Human Resource Definitions

Needed Complement: The number of workers needed this year if the company is to avoid overtime. Complement: The number of workers in your workforce this year. This year's complement percentage is entered on the Production spreadsheet in the This Year (%) column. It also appears in the second row of the Human Resource spreadsheet. Suppose you enter a percentage that is less than 100. Employees must work overtime to complete the work schedule. Excessive overtime drags down productivity and increases turnover. 2nd Shift and overtime workers cost 50% more per hour than workers on 1st Shift.

1st Shift Complement: For each product, if your schedules are less than or equal to the 1st Shift Capacity, your workers will only be used on a 1st Shift. 2nd Shift Complement: If for any product your schedule is greater than your 1st Shift Capacity, and if the This Year (%) is at or near 100%, workers will be added to a 2nd Shift. 2nd Shift workers are paid 50% more per hour than 1st Shift workers. 2nd Shift scheduling has no impact upon the Productivity Index. Overtime Percent: The percentage of work performed on overtime. 100% means that every 1st Shift worker is doing a double shift. 15% means that, on average, workers perform 15% overtime. Overtime increases turnover and drags down productivity. Turnover Rate: The percentage of workers who left the company last year, excluding downsizing. About 5% is rooted in unavoidable factors like retirement, relocation and weeding out poor workers. Remaining turnover is a function of employee dissatisfaction. The best workers leave first. Turnover is driven down by Recruiting Spend and Training Hours. Turnover also goes up as a result of overtime and a substandard compensation package from the Labor Negotiation.

The Turnover Rate ignores downsizing factors. It reflects the turnover in the population of workers that you keep after downsizing (that is, reducing production schedules or increasing automation).

New Employees: Employees recruited this year. At a minimum, New Employees reflects replacement of workers lost during the course of the year to turnover. It also includes workers hired in January to increase the Complement from last year. New employees incur a Recruiting Cost. As a simplifying assumption, the simulation does not rehire fired or separated workers. Separated Employees: Employees lost because of downsizing or increases in Automation. Specifically, Separated Employees is Last Year's Complement minus This Year's Complement. All separations occur in January and incur a Separation Cost. Recruiting Spend: Recruiting Spend is the extra amount budgeted per worker to recruit high caliber workers. The higher the budget, the better the worker, resulting in a higher Productivity Index and lower Turnover. Your entry is added to a base amount of $1,000 per new employee. $0 means no extraordinary effort is spent recruiting new people. Diminishing returns apply after $5,000 per worker. Training Hours: Training Hours is the number of hours each year that each individual worker is taken off-line for training and development. For example, 40 means that each worker will spend 40 hours in training this year. Training produces a higher Productivity Index and a lower Turnover Rate. The more time off-line, the higher the needed Complement. Each training hour costs $20.00 per worker in training costs. Productivity Index: The Productivity Index indicates how the general workforce compares with the workers employed in Round 0. 100% means that current workers are just as good as original workers. 110% means that, on average, you only need 91% (100 / 110 = 91) of the Complement to do the same work as a workforce comprised of original

workers. In short, higher productivity means fewer workers are required, and that drives down per unit labor cost. Recruiting Spend and Training Hours drive up the Productivity Index. Overtime drags down the Productivity Index. This Year actually means by the end of this year. Last year's Productivity is the driver behind your Complement requirements this year because it indicates your productivity level on January 1. Recruiting Cost: The amount spent to recruit new workers. It equals the number of workers recruited times ($1,000 + Recruiting Spend). Separation Cost: The cost to separate (fire) workers. If you downsize your workforce (by reducing production schedules or increasing automation), each worker is given a separation package worth $5,000. Training Cost: Training costs are driven by Training Hours. Each worker-training hour costs $20.00 and pays for such things as educational materials, instructors, etc. Training costs do not include time off the job. Total HR Costs: Total HR istrative Costs are incorporated into the income statement's line item. Costs are allocated to products based upon their Complement. For example, if Able has 10 workers and Acre has 20, then the HR costs (training, recruiting, etc.) would be twice as much for Acre as for Able. to the Capstone Spreadsheet and click the Decisions menu. Select Production to enter the This Year Complement (%). Select Human Resources to enter Training Hours and Recruitment Budgets.

1. Production runs can be scheduled in A. only one shift B. always two shifts C. one or two shifts D. up to three shifts Up to twice the production line's First Shift Capacity can be scheduled for each individual product. Production runs that exceed the First Shift Capacity result in either Overtime and/or a Second Shift, depending on the Worker Complement.

2. Hiring the Needed Complement will always eliminate A. Overtime B. worker layoffs C. a Second Shift D. strikes Hiring the Needed Complement eliminates all Overtime. The Second Shift workers are paid the same as workers on Overtime, however, Second Shift workers are more efficient and do not seek work elsewhere, therefore reducing turnover.

3. Management should strive to

A. increase Turnover B. decrease Turnover Lowering Turnover reduces Recruitment costs.

4. Increasing Capacity tends to A. reduce the Needed Complement B. reduce the number of workers on Second Shift C. reduce Overtime Increasing Capacity tends to reduce the number of workers on the Second Shift. As an example, a production order of 1,200 units on a line with a Capacity of 800 units (numbers in thousands) will require 400 units to be produced by the Second Shift. Increasing Capacity to a total of 1,000 units will result in 1,000 units manufactured by First Shift labor, and only 200 units produced by more expensive Second Shift labor.

5. Increasing Training Hours tends to A. increase the Needed Complement B. decrease the Needed Complement C. neither increase nor decrease the Needed Complement D. both increase and decrease the Needed Complement In the short term, increasing Training Hours will increase the Needed Complement-- Workers are taken off the production line and put in the classroom. However, as time goes on, investing in Training Hours increases worker productivity, and therefore tends to decreases the Needed Complement.

6. Recruiting Costs are incurred when A. Automation levels increase B. Production runs increase and teams match hiring to Needed Complement C. workers are assigned to a Second Shift Increasing production and then matching the Needed Complement will result in new hires, and therefore increase Recruiting Costs.

7. Assuming the Productivity Index is greater than 100%, adding Overtime will A. increase the Productivity Index B. decrease the Productivity Index While the Productivity Index can never fall below 100%, it is possible for teams to increase the Index by investing in a higher quality of worker (Recruiting Spend) and in education (Training Hours).

However, scheduling Overtime will decrease the Index because workers will become tired and disgruntled.

8. Worker training is entered by the A. Hour B. Dollar Hours are entered on the HR Screen. Training costs $20.00 per hour per worker.

9. Teams can eliminate all Recruiting Costs if they wish A. True B. False Teams can choose to enter 0 in the Recruiting Spend cell on the Human Resources screen, however that number is in addition to a base Recruiting Cost of $1,000 per worker. A Recruiting Spend entry facilitates recruiting a better quality of worker.

10. Generally, Separation Costs will be incurred when A. Production levels increase B. Automation Levels increase C. Production Levels decrease D. Production levels decrease and / or Automation levels increase The Needed Complement is determined by a combination of: a) the number of units ordered into production; and b) the Automation level of the assembly lines. Decreasing the number of units produced from one year to the next will decrease the Needed Complement. Similarly, increases in Automation will decrease the Needed Complement. If teams adjust the This Year cell to match the Needed Complement, Separation Costs will be incurred.

abor negotiations are entered on the Human Resources spreadsheet. Negotiations can be viewed as exception events– sudden changes in the operating environment. Labor opens the contract offers from all of the companies, picks the most favorable , and uses them as a standard for negotiation with every company. This creates an opportunity for a low labor-cost company (due to automation and other investments) to impose higher labor costs upon other firms.

After reviewing this section, test your knowledge by clicking Labor Quiz to the left. Labor and management negotiate over four separate categories: o

Hourly Wage

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Benefits

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Profit Sharing Percent

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Annual Raise If the current contract expires during the year, your company establishes a bargaining position that is bounded by a Starting Position and Negotiation Ceiling. The Starting Position (first) wage offer cannot be less than 80% or more than 150% of your current contract. The Starting Position for Benefits, Profit Sharing, and Annual Raise can be between 0% and 150% of your current contract. The spreadsheet automatically enters a Negotiation Ceiling that is 10% above each Starting Position. Each company will have its own Starting Position and Negotiation Ceiling for the four categories. The example below shows Hourly Wages Starting Positions and Negotiation Ceilings for three companies (figure below):

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Company 1 has a Starting Position of $16.00 and a Ceiling of $17.60;

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Company 2 has a Starting Position of $23.00 and a Ceiling of $25.30;

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Company 3 has a Starting Position of $24.00 and a Ceiling of $26.40.

Labor Negotiation Ranges

Labor will ask for a 10% across the board wage and benefit increase. For example, if the wage were currently $20.00 per hour, labor demands $22.00 per hour.

However, if any of the Starting Position offers is higher than the 10% increase, labor will adjust its demand upward to match it. Company 3’s Starting Position for wages is $24.00, therefore labor now demands $24.00 from all companies. Labor accepts Company 3’s offer of $24.00 per hour (figure below).

Company 3 Agreement: Labor ups its industry-wide hourly demand to $24.00, and accepts Company 3’s Starting Position of $24.00.

If labor’s demand is within the company’s Starting Position and Negotiation Ceiling, negotiations lead to an agreement. Company 2’s negotiators have instructions to issue a Starting Position of $23.00 and a Negotiation Ceiling is $25.30. Company 2’s negotiation range brackets labor’s demand. They will agree at $23.50, halfway between the $23.00 Starting Position and labor’s demand of $24.00 (figure below).

Company 2 Agreement: Company 2’s Starting Position ($23.00) and Negotiation Ceiling ($25.30) bracket Labor’s demand of $24.00. Negotiators settle at a wage of $23.50, halfway between $23.00 and $24.00– there is no strike.

Company 1’s Negotiation Ceiling is $17.60. If the top of the Negotiation Ceiling is below labor’s demand, labor strikes. At the end of the strike the two sides will settle halfway between the company’s Negotiation Ceiling and labor’s demand, or at $20.80 (figure below). Strike lengths depend on the spread between positions.

Company 1 Strike Settlement: Company 1’s Negotiation Ceiling of $17.60 is less than Labor’s demand of $24.00. The workers strike (see Table 7.1). Eventually, a settlement is reached for at a wage of $20.80.

The maximum length of a strike is 84 days, at which point both sides accept arbitration. Workers will strike approximately seven days for every:

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$1.00 difference in wages

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$300.00 difference in benefit package

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Percentage point difference in Profit Sharing

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Percentage point difference in Annual Raise Table 7.1 illustrates a strike example. Strikes always occur at the end of the year. If a strike is 46 days long, workers would picket from the middle of November to the end of December. If you have inventory on hand during the strike, sales continue. R&D projects also continue. 7.3.1 Tactics

You will need to determine which negotiation tactics best serves your purposes. Companies with low automation will want to control labor costs. They could offer the lowest acceptable wage, which is 80% of the current contract and eliminate all benefits. Companies with high automation might choose to be extremely generous with their workers, which will impose higher costs on their competitors (, labor looks at all offers and makes the highest offer part of their demand). If a low wage/benefit tactic is employed, the labor turnover rate (and therefore recruiting costs) will increase. Also, if the Human Resource Module is activated, gains to the productivity index might be erased (see 7.2 Human Resources). The Human Resources area automatically calculates Negotiation Ceilings that are 10% above the Starting Positions.

Table 7.1 Example of a Negotiation Position and Resulting Strike Time: Note that the Annual Raise is 0% to 0%, this is because 110% of 0 is 0

Starting

Negotiation Demand

Position

Ceiling

Contract

Approximate Strike Days

Hourly Wage $18.00

$19.80

$22.00

$20.90

15

Benefits

$2,750

$2,750

$2,625

0

$2,500

Profit

1.5%

1.7%

2.2%

1.95%

4

Annual Raise0.0%

0.0%

7.2%

3.6%

50

Sharing

Total Days of Strike

69

to the Capstone® Spreadsheet and click the Decisions menu. Select Human Resources to enter Negotiation Starting Positions for Wages, Benefits, Profit Sharing and Annual Raise.

Labor Entries

1. The new contract that you negotiate with Labor will take affect: A. Starting January 1st of the year after the negotiation B. Starting October 1st of the year after negotiation C. Starting July 1st of the current year D. Starting January 1st of the year the contract is renegotiated E. None of the above REMARKS: The contract is negotiated in the last weeks of the current year. The new contract begins January 1 of next year. 2. Generally speaking, a team with high levels of automation would be inclined to: A. Make a "low ball" offer to the unions in order to further lower costs B. Make a generous offer to the unions to avoid a strike and impose higher labor costs on competitors C. Not be inclined either way, the only thing that matters is inventory levels D. Be generous on only the wage parameters E. None of the above REMARKS: Of course, the team might do any of the above. At an automation rating of 10.0, however, the labor cost per unit is very low, say $1.50 per unit. (Actual numbers vary with contract and time.) Labor costs per unit are low because few workers remain in the plant. If the team offers a 50% raise, its costs increase to $2.25 per unit. A competitor with higher labor costs, say $10 per unit, would see a $5.00 jump if it offered a 50% raise. Teams with high labor costs are motivated to contain them even if that means a strike. Teams with low labor costs can afford to behave capriciously. 3. True or False. Labor sees all of the opening offers from all of the teams at once.

A. True B. False REMARKS: The labor negotiation is a "pattern bargaining" event. Labor opens the contract offers from all of the companies, picks the most favorable , and uses them as a standard for negotiation with every company. This creates an opportunity for a low cost producer to impose higher labor costs upon other firms. The low cost producer has far fewer workers than other companies. By giving Labor everything that they wish, perhaps even more than they wish, the low cost producer imposes higher negotiation ranges, which in turn leads to strikes and higher cost structures. 4. True or False. The maximum length of a strike is 12 weeks. A. True B. False REMARKS: Strike length depends upon the spread between your top offer and Labor's demands. The maximum length of a strike is 12 weeks, at which point both sides accept arbitration. Strikes last one week for every $1 difference in wages, $300 difference in benefit package, and percentage point difference in profit sharing or wage escalator. 5. Suppose workers earn $20.00 in the current contract. There are only two teams, Andrews and Baldwin. Labor demands $22.00. Andrews gives its negotiators a range of $20.20 to $22.20. Baldwin gives its negotiators a range of $23.00 to $25.00. Will Labor strike: A. Andrews B. Baldwin C. Both D. Neither REMARKS: Although Andrews would not experience a strike under the original Labor demand, Baldwin changed the game with its opening offer of $23.00. Labor will now demand $23.00 from Andrews. Andrews negotiators will hit their ceiling at $22.20. The strike will settle a few days later at $22.60. Baldwin will not experience a strike. Baldwin's technicians will get $23.00 next round. (Ignores wage escalator.) 6. In the current contract, the workers wage rate is $20.00. Which of the following negotiation ranges would be outside the rules? A. $15.60 to $16.80 B. $18.00 to $18.00 C. $30.00 to $32.00 D. $30.20 to $32.20 E. Both A and D would be outside the rules. REMARKS: "A" fails because your opening wage offer cannot be less than 80% of your current contract. "D" fails because your opening offer cannot be higher than 150% of the current contract. In both cases, the opening offers would be adjusted. $7.80 would become $16.00. $30.20 would become $30.00. 7. There are two teams, Andrews and Baldwin. As a result of an earlier labor negotiation, Andrews workers earn $22.00. Baldwin workers earn $24.00. What will Labor demand? A. Andrews $24.00. Baldwin $26.40. B. Andrews $26.40. Baldwin $26.40. C. Andrews $24.20. Baldwin $26.40. D. Andrews $24.00. Baldwin $24.00

E. None of the above. REMARKS: Labor will demand parity with industry "best" from Andrews. The industry best is Baldwin's $24.00. Labor will demand a 10% increase from the industry leader. Since Baldwin currently pays $24.00, Labor will demand $26.40.

The Marketing Module allows companies to have greater control over their Marketing Budgets. When the Marketing Module is activated an arrow appears to the right of Marketing in the Decisions menu in the Capstone Spreadsheet. A submenu expands when the cursor es over the arrow: o

Prices and Sales Forecasts for each product are entered in the Pricing & Forecasting area;

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Selecting Promo Sales in the Marketing submenu opens the Marketing Budget Detail area (alternatively, click the gray Promo Budget or Sales Budget buttons in the Pricing & Forecasting area). Please Note: When the module is active the marketing dynamics change. For example, maintaining 100% awareness is extremely difficult. 7.4.1 Promo Budget

The Marketing Budget Detail screen allows companies to allocate their Promo Budget among five different media channels. Projections of the round's awareness display in a bar chart at the bottom of the screen. Reach and Frequency

From a strategic marketing perspective, it is important to recognize that each segment responds differently to each media type. Relative strength is driven by two factors: o

Reach — The potential number of customers who would see the message;

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Frequency — The number of times a message is repeated. In theory, every customer could eventually see your message if it were repeated with enough frequency. However, it would be prohibitively expensive to try and reach every occasional magazine reader. Using Print Media for the Traditional Segment as an example, placing an ad one time will reach 25% of all Traditional customers. Running the ad a second time will reach a somewhat different group of Traditional customers (still totaling 25% of all Traditional customers). However, there is an overlap between the first and second groups. Some customers see the ad twice, some for the first time. Each repetition catches a group of new customers, and exposes a group of former readers to the ad. It becomes increasingly difficult to get every potential customer to see the ad (Reach), but on the other hand, each time a customer sees the ad (Frequency), the more likely it is that the message will be ed. An impression is created each time a customer sees your message.

Target Segment

The list boxes beneath the product names on the Marketing Budget Detail spreadsheet indicate the primary segment towards which promotions will be targeted.

Promotion Entries

Print Media

For each product, enter the budget in thousands you wish to spend in Print Media — industry-related magazines and newspapers. Your staff will optimize Reach and Frequency for whatever dollar amount you choose. Potential Reach varies by segment: o

Traditional — Good

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Low End — Good

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High End — Poor

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Performance — Poor

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Size — Fair Diminishing returns apply — as the number of ads increases, each ad produces smaller gains in message retention and leads. Beyond $700 thousand per product, the cost to gain additional awareness becomes prohibitive. Direct Mail

Enter your Direct Mail budget in thousands for each product. Campaigns send one piece of literature about your product to a purchased mailing list. Lists are selected on the basis of SIC code, job title, and similar factors. Potential Reach varies by segment: o

Traditional — Good

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Low End — Good

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High End — Fair

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Performance — Poor

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Size — Poor Diminishing returns apply — as the number of mailings increases, each mailing produces smaller gains in message retention and leads. Beyond $800 thousand per product, the cost to gain additional awareness becomes prohibitive. Web Media

For each product, enter the budget in thousands for industry-related websites and search engines. However, this method creates many wasted hits. In a search engine, you might produce hits on sensor, electronic, temperature, RPM, etc. Hits are usually a product of single-word matches, not of phrases (although some search engines will produce hits on phrases). Therefore, while your search engine ads are far more likely to reach customers than a generic banner ad, only a few of the hits are seen by relevant customers. Potential Reach varies by segment: o

Traditional — Poor

o

Low End — Poor

o

High End — Fair

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Performance — Good

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Size — Good Diminishing returns apply — as the number of ads increases, each ad produces smaller gains in message retention and leads. Beyond $500 thousand per product, the cost to gain additional awareness becomes prohibitive. Email

For each product, enter your budget in thousands for a Email campaign. An Email campaign is similar to Direct Mail. You purchase a list from a marketing company, and they send an email on your behalf to a targeted list (job title, SIC code, etc.) Readers are invited to respond directly or click a hyperlink to your website. Potential Reach varies by segment: o

Traditional — Poor

o

Low End — Poor

o

High End — Fair

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Performance — Good

o

Size — Good Response rates vary with the caliber of the list and the frequency. Diminishing returns apply – as the number increases, each campaign produces smaller gains in message retention and leads. Beyond $600 thousand per product, the cost to gain additional awareness becomes prohibitive. Trade Shows

Trade Shows allow you to meet face to face with your customers in a convention-like setting. Enter your budget in thousands for trade shows. Potential Reach varies by segment: o

Traditional — Fair

o

Low End — Fair

o

High End — Good

o

Performance — Fair

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Size — Poor Diminishing returns apply. As the number of shows increases, each show produces smaller gains in message retention and leads. Beyond $300 thousand per product, the cost to gain additional awareness becomes prohibitive. 7.4.2 Sales Budget

The Marketing Budget Detail screen allows companies to allocate their Sales Budget among three different sales channels. Projections of the round's accessibility display in bar a chart at the bottom of the screen. Outside Sales

Enter the number of sales people and manufacturers reps in your outside sales force for each segment. The outside sales force meets the customer in face-to-face sales calls. Each sales person costs $125,000, which includes salary, commission, travel and . Diminishing returns in a segment is reached at 12 sales people. For example, if your company is in all five segments, you would reach diminishing returns at 12 sales people in each segment, for a total of 12*5 = 60 sales people, and a

total outside sales budget of 60 x $125,000 = $7,500,000. However, if your company only offered products in Traditional and Low End, you could only benefit from a total of 24 sales people. Inside Sales

For each segment, enter the number of inside sales people. Each inside sales person costs $50,000. Diminishing returns in a segment is reached at 30 sales people. For example, if your company is in all five segments, you would reach diminishing returns at 30 sales people in each segment, for a total of 150 sales people, and a total inside sales budget of 150 x $50,000 = $7,500,000. However, if your company only offered products in High, Performance and Size, you could only benefit from a total of 90 sales people. Distributors

For each segment, enter the number of distributors carrying your product. Distributors offer customers an opportunity to see your product, compare it with other products, and take delivery. Each distributor costs $100,000 per year. Diminishing returns in a segment is reached at 15 distributors. For example, if your company is in all five segments, you would reach diminishing returns at 15 distributors in each segment, for a total of 75 distributors, and a total budget of 75 x $100,000 = $7,500,000. However, if your company only offered products in High, Traditional and Low, you could only benefit from a total of 45 distributors.

Sales Channel Effectiveness

For each segment, some channels work better than others. For example, the one on one interaction of an outside sales person is very effective when meeting High End customers, however those same customers are not likely to visit a distributor's sales room. Traditional and Low End customers are most likely to visit a distributor.

Outside Sales Inside Sales Distributors 7.4.3 Time Allocations

Traditional

Low End

High End

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Size

Low

Medium

High

Medium

High

Medium

Low

Medium

High

Medium

High

High

Low

Low

Low

The Time Allocations column gives companies an opportunity to fine-tune their sales efforts. Time Allocation entries determine what percentage of time the Sales staff and Distributors will devote to each product.

Time Allocations

In general, teams should make their Time Allocations consistent with their segment priorities. However, if a company wants to improve sales for one of its products, it can instruct the Sales department to increase the percentage of time spent selling that product. This will boost sales for that product during the current round. It will do nothing for the product's Accessibility (Accessibility is defined at the segment level, not the product level). Stated simply, higher Time Allocations mean greater sales efforts by your staff, and this translates into increased demand for that product. Your overall Sales Budget drives two factors, Accessibility and Salesmanship. Accessibility examines infrastructure, is subject to diminishing returns, and is partially ed from round to round. Salesmanship Time Allocations applies only to this year. Increasing a Time Allocation for a product will increase that product's sales , however this would be at the expense of other products' Time Allocations. Please Note: Time allocations must total 100%. If the allocations for products total less than 100%, the remainder will be assigned to the last NA (Not Applicable) cell. If this happens, reformulate your percentages for your products until they total 100%. If you have 8 products, adjust the numbers of the other 7 products until they total 100% minus the desired percentage for the 8th product. In Excel, percentages can be entered one of two ways. For example, 15% can be entered with a decimal as 0.15 or as the number 15 followed by the percent sign. When using the decimal, be sure the percentage sign is deleted before pressing Enter. These cells are set for percentage, therefore entering only the number 10 (without a decimal or a percentage sign) will yield an entry of 1000%. It is very important to always use either the decimal point or percentage sign. When the Marketing Module is activated an arrow appears to the right of Marketing in the Decisions menu in the Capstone Spreadsheet. A submenu expands when the cursor es over the arrow: o

Prices and Sales Forecasts for each product are entered in the Pricing & Forecasting area;

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Selecting Promo Sales in the Marketing submenu opens the Marketing Budget Detail area (alternatively, click the gray Promo Budget or Sales Budget buttons in the Pricing & Forecasting area).

1. True or False: Forecasts are set on the Marketing Budget Detail spreadsheet. A. True B. False When the Advanced Marketing Module is activated, marketing activities are divided between two spreadsheets. Prices and forecasts are entered on the Pricing & Forecasting spreadsheet.

2. True or False: Each market segment responds to different types of media (e.g. print, direct mail, etc.) to a varying degree. It follows that each product must be identified with its target segment. Product target segments are identified by their placement on the Perceptual Map. A. True B. False The Marketing Budget Detail includes a combo box for each product that allows teams to define the product's target segment. If teams anticipate moving a product from one segment to another (perhaps an R&D project completes in mid year) they can define the target segment at the beginning of the year.

3. Each additional ment increases customer awareness by _____________the first. A. the same amount as B. a lesser amount than C. a greater amount than Increasing the number of ments does not linearly increase Awareness. When the ment runs a second time, a percentage of people who saw it the first time will see it again. Those who see the ad twice do not become aware of the product when they see it the second time. Therefore, the second placement does not add as much Awareness as the first-- the result, diminishing returns apply.

4. True or False: The Marketing Budget Detail asks teams to determine budgets by product and segment. A. True B. False On the Marketing Budget Detail, the Promotion Budget Resource sections asks teams to assign budgets by product, but the section also asks teams to assign a target segment for each product. This facilitates products that might start the year in one segment, then as an R&D project completes, moves to another segment. Teams can begin promoting in the new segment prior to the move. The same holds true for a product that will have a new segment drift over it. In the Sales Budget Resource, Sales budgets are allocated by Segment. However, Sales budgets can be fine tuned with the Product Allocations box. For example, if teams have two products in one segment, the Product Allocations box can be used to prioritize one product over the other.

5. In the Promotion Budget Resource, teams can select which of the following media areas. A. Print Media and Television B. Email and Telephone C. Trade and Road Shows D. Web Media and Direct Mail The scenario utilizes business to business media outlets that reach Original Equipment Manufacturers (OEMs). Television, for example, is not an efficient way to reach OEMs.

6. The Target Segment selection lets teams: A. move their products from one location on the Perceptual Map to another B. select which segment their promotion efforts should be directed towards. C. Both A and B The Target Segment selection pertains exclusively to Promotion, and allows teams to select which segment their promotion efforts should be directed towards.

7. In the Sales Budget Resource, the outside sales force meets with customers face-to-face. The cost of each salesperson includes which of the following? A. Salary and commission B. Travel and C. None of the above D. Both A and B Each salesperson costs $125,000, which includes salary, commission, travel and .

8. Each inside salesperson costs. A. $50,000 B. $75,000 C. $60,000 D. $40,000 The inside sales staff works the existing customer list. Each inside salesperson costs $50,000.

9. True or False: Distributors are a separate Sales channel. A. True B. False Distributors place your product in their own showrooms. You pay each distributor $100,000 per year to

stock your product line.